'A cat-and-mouse game': Why closing tax haven loopholes is a challenge

The revelations pouring outof the Paradise Papers haveonce again raised questions about the use of tax havens and how wealthy individuals and corporations are able to use such structures tolegally shelter their money from taxation.

The huge leak of more than 13 million records wasobtained by German newspaperSuddeutscheZeitungand shared exclusively in Canada withCBC/Radio-Canada and the Toronto Star via the International Consortium of Investigative Journalists (ICIJ). Itshows how individuals and corporations have used offshore accounts,engaged in creativebookkeeping andexploited loopholes to legally avoid taxes.

Thesestructuresare there to help Canadian companies. WalidHejazi, University of Toronto

But the laws that allow the use of tax havens exist for a reason.

"You don't want to throw the baby out with the bathwater," said WalidHejazi, associate professorof economic analysis and policy at the University of Toronto's Rotman School of Management.

"Thesestructuresare there to helpCanadiancompanies do business intheglobal economy.

"When the structures are used in the way they were intended to be used, it's good for the Canadian economy, Canadian employment."

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But some argue that such structures end up costing the government billions of dollars in potential tax revenue, money that could be used to support much-needed social programs.

As well,critics argue such tax havens havegiven rise to aggressive and controversial tax avoidance schemes, through whichfirms are created in name only, with no staff or offices, and used solelyto lessen their parent company's tax burden.

For example, the ParadisePapers revealedthe case of Stephen Bronfman and his ties to an offshore trust in the Cayman Islands. One of the issues raised here is whether the trust wasreally managed offshore, meaning it would be eligible for a hugetax break, or in Montreal, where it would be subject totaxes.

The ParadisePapers also shed light on Nike's scheme to shift billions of dollars in profits to Bermuda from Europe. According to the ICIJ,Nike createda subsidiary in Bermuda which held ownership of the company's Swoosh logo and other trademarks for markets outside the U.S. This meant the Bermudansubsidiary was able to charge trademark royalty fees to Nike's European headquarters. And this shifted billions in profits away from Europe to tax-free Bermudawhere Nike has no staff or offices.

Meanwhile, the ParadisePapers also revealed how the Bank of Montreal discussed cutting the number of executives it needed to be flown to Bermuda a couple times a year so one of its subsidiaries, based there withno staff or premises, would still be eligible for tax breaks.

Here in Canada, companies are indeed encouraged to use offshore havens, said tax law scholar Arthur Cockfield. The argument goes that such offshore accounts allowcorporations togo global andcompete in the international marketplace. Those in favour of tax havens say that if an international competitor was able to take advantage of a tax haven, and a Canadian company was not, the latter would be at a competitivedisadvantage.

However,Cockfieldsays, while big business is often correct to say it needs tax breaks, "often the tax breaks are overly generous."

'Economic purpose'

Efforts have been made to rein in the use of such tax havens. Recently, NDPMP Murray Rankinintroduced a private member's bill that, if passed, would require companies to prove that their transactions with offshore accounts have an "economic purpose" other than to avoidtax.

But such efforts touch on what Cockfiled says is an ongoing "cat-and-mouse game" which, also, explains why the Income Tax Act is "far and away the most complicated piece of legislation in Canada."

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Lawyers and accountants are able to exploit loopholes in the tax laws or interpret them in an overly generous manner. This leads to the government attempting to pass a law to close such loopholes. Industry stakeholders cry foul, argue such measures would hurt business, and the laws are scuttled.

As well, some lobbyists have political connections. ACBC News/Toronto Star investigation, for example,found that a Montreal law firm representing clients closely connected to the federal Liberal Party was a leading player in a campaign to block offshore tax legislation passed by the House of Commons.

Since domestic efforts to clamp down on use of tax havens may be challenging, there have been suggestions that the best solution would be to develop some sort of world tax organization in order to level the playing field andrequire countries meet minimum standards of taxation.

However, taxation is different from other kinds of laws. Governmentsuse the tax system to pursue differing socio-economic agendas, meaning it's unlikely any government would ever agree to be bound at the international level, Cockfield said.

"It's really a kind of chicken and egg problem. Unless you have a world tax organization that creates all common rules, the problem won't get fixed."

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Cockfield said he doubts moves to go after countries thatallow such tax havens would be fruitful. Barbados, for example, is Canada's thirdlargest outward, foreign-directed investment destination, where thousands of Canadian companies do business.

"So we're saying they're keyto our global success strategies. We can't really then start to try to punish them."